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Corporate Law Newsletter | March 2016: case law

This judgment concerns the rules governing warranty clauses (commonly identified as “representations and warranties”) included in share and purchase agreements, namely examining their admissibility and pointing out the consequences for the defaulting party should they be breached.

In this specific case, to sum up, the applicants claimed that there was a situation of false information provided by the defendants, which resulted in a significant discrepancy between the situation declared by the seller companies (defendants) and the actual situation of these same companies which were the object of the transaction .

Given the facts alleged, the Court began by classifying these warranty clauses as an instrument for sharing contractual risk admissible in the light of the principle of freedom of contract (Article 405 of the Portuguese Civil Code), formulated in order to mitigate the information imbalance between the buyer and the seller when a share and purchase agreement is entered into.

Moreover, these clauses constitute a privileged means of protection for the buyer, since the seller assumes full responsibility for the risk of the conditions guaranteed not being met, regardless of guilt.

For this reason, the Court concluded that the breach of a warranty clause does not generate a duty to compensate, but instead a duty to provide in the strict sense, which correspon ds to the difference between the economic value guaranteed by the seller company and its real value as subsequently verified.